WTI crude oil
Coronavirus pandemic put significant pressure on the oil market in 2020, but oil will start the year 2021 in a decent shape.
The most important catalyst for oil right now is vaccine optimism. Traders believe that mass vaccination in developed countries will soon put the pandemic under control, so that their economies will enjoy a strong downturn and demand for oil will increase.
Although the first quarter of 2021 will be difficult due to ongoing problems on the virus front, demand is expected to increase gradually over the next quarters.
At present, OPEC expects global oil demand to average 95.89 million barrels per day (bpd) in 2021, but will reach a rate of 97.29 million bpd in the fourth quarter of 2021.
The lack of travel demand is currently the biggest problem for the oil market. In this light, the new strain of coronavirus that has emerged in the UK could present a major challenge as it spreads to other countries. In this scenario, more borders will be closed and fewer planes will fly.
However, most experts believe that vaccines against this new strain and other possible mutations of the coronavirus should be effective, and therefore any additional problems should be temporary. At this point, it looks like oil demand will be ready for a significant downturn by the time the management season begins in 2021.
The situation is also interesting on the supply side, as OPEC + will have to carefully evaluate the fundamentals of the market as it tries to bring its production closer to normal levels. The group will increase production by 500,000 bpd in January, but it may have to pause after this increase due to soft demand in Europe.
The most important task for OPEC + is to maintain discipline despite rising oil prices. OPEC + members do not want to provide the US shale with additional market share, but recent data indicates that US production is not increasing.
OIE expects US domestic oil production to remain close to the current level of 11 million bpd. If this prediction is correct, OPEC + will be able to gradually increase its production levels without exerting significant market pressure.
I would also like to note that compliance with the OPEC + production cutback agreement is likely to deteriorate in 2021 as OPEC + members try to increase their revenue, but this must remain at high levels as each country understands the fragility of the current supply / demand balance .
In addition to rising demand and responsible supply, the oil market may benefit from the weakness of the US dollar. The US currency remains under significant pressure, and further downside will be provided by commodities including oil.
The biggest risk to the oil market is the uncontrolled continuation of the coronavirus pandemic. It’s a big game map, but it looks like the current vaccination effort should be enough to bring life closer to the summer of 2021 back to normal.
As usual, traders will continue to follow all developments on the stock front. According to the recent EIA Weekly Petroleum Status report, crude stocks in the US are about 11% above their five-year average for this time of year, so there is plenty of work to do. If crude stocks fall closer to normal levels, oil can gain more ground.
All in all, the current configuration looks clumsy for oil despite current problems on the demand side. OPEC + has proven its ability to coordinate production cuts, countries have started vaccinating mass programs and inventory levels are declining. In this light, the year 2021 has the potential to bring good news for oil bulls.
Natural gas
The natural gas market has managed to return from lows reached in the first half of 2020 and will try to stay at higher levels in 2021.
Domestic demand for natural gas is expected to remain soft. According to the EIA, natural gas consumption will decrease by 2% in 2020, followed by a decrease of 4.8% in 2021.
In this situation, natural gas prices will mostly depend on two main factors – the volume of US gas production in the US and the strength of the demand for LNG exports.
The EIA believes that natural gas production in the US will be under pressure this winter, but will begin to recover in the second quarter of 2021. However, it remains to be seen whether the boom will be strong, as energy companies suffered a severe blow in 2020. will likely remain cautious with their capex plans in 2021.
Meanwhile, LNG exports are still increasing. In November, US exported 9.4 Bcf / d of LNG, which was a monthly record. Most analysts expect demand for LNG to continue to rise, which will be strong for domestic natural gas prices.
Without the support of LNG exports, the domestic market will soon find itself under pressure from overproduction, so the sustained increase in LNG exports is essential for the health of the local market.
The EIA expects the price of natural gas to average $ 3.01 per MMBtu in 2021, which will be a huge improvement over the price levels seen in 2020. Weather, as usual, will remain an important factor, but the financial situation of US energy industries will play a greater role.
It’s hard to believe that after a very challenging year, American companies will try to produce as much gas as possible, so supply will probably be more responsible than in the previous year.
In addition, investors are clearly not ready to fund another round of expansion after being burned several times, which is good for the long-term health of the market.
The current setup looks moderately bullish for the natural gas market. The weakness of domestic demand is likely to be offset by the increasing LNG exports and conservatism on the supply side.
At the same time, the market does not seem ready for any major rise. As usual, the natural gas market will be very volatile from time to time, but there are no catalysts for a large sustainable price increase. That said, surprises are always possible, and the market could still experience strong price fluctuations in 2021.
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This article was originally posted on FX Empire